An Overview of the Kauffman Firm Survey: Results from 2010 Business Activities

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2012 by the Ewing Marion Kauffman Foundation. All rights reserved.

KauffmanFirm Survey

The

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A N O V E R V I E W O F T H E K A U F F M A N F I R M S U R V E Y : R E S U L T S F R O M 2 0 1 0 B U S I N E S S A C T I V I T I E S 1

May 2012

Results from 2010 Business Activit ies

An Overview of theKauffman Firm Survey

Prepared By:

Alicia RobbE.J. Reedy


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A N O V E R V I E W O F T H E K A U F F M A N F I R M S U R V E Y : R E S U L T S F R O M 2 0 1 0 B U S I N E S S A C T I V I T I E S2

Executive Summary ............................... ................................. .................................. .................................. .............................. 3

Overview ............................... .................................. ................................. .................................. .................................. ............. 4

Table 1: Most Challenging Problems Facing Businesses ..................................................................................................... 5

Table 2: Financing Experiences (20082010) .................................................................................................................... 5

Table 3: New Financial Injections...................................................................................................................................... 6

Table 4: Intellectual Property in 2010 ................................................................................................................................ 6

Table 5: Spending on Research & Development and Intangible Assets ............................................................................... 7

Product, Service, and Process Innovations ................................ .................................. .................................. ........................ 7

Table 6: Selected Firm Characteristics in 2010 ............. ............... .............. ............... .............. ............... .............. ............... 7

Table 7: Employment by KFS Firms ............. ............... .............. ............... .............. ............... .............. ............... .............. ... 8

Table 8: Distribution of Revenues and Assets in 2010 ........................................................................................................ 8

Figure 1: Firm Survival 20052010 .................................................................................................................................... 8

An Overview of the Kauffman Firm SurveyResults from 2010 Business Activi t ies


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Executive SummaryAlthough entrepreneurial activity is an important

part of a capitalist economy, data about U.S.

businesses in their early years of operation havebeen extremely limited.1 Only recently has itbecome apparent what important contributionsnew and young businesses make to job creationand innovation activities.2 As part of an effort tounderstand the dynamics of new businesses inthe United States, the Ewing Marion KauffmanFoundation (the Foundation) sponsored theKauffman Firm Survey (KFS), a panel study of newbusinesses founded in 2004 that are being trackedannually over their first eight years of operation.Tracking businesses over time allows us to followbusiness evolutions that would not be apparent in

cross-sectional snapshots, the more typical collectionmethod. The KFS dataset provides researcherswith a unique opportunity to study a panel of newbusinesses from startup to sustainability (or exit),with longitudinal data centering on topics such ashow businesses are financed; the products, services,and innovations these businesses possess anddevelop in their early years of existence; andthe characteristics of those who own andoperate them.

Data currently are available through calendar year2010, the seventh year of operations for continuingbusinesses. Additionally, since our panel came

into existence before the most recent recession,following these businesses allows us to get a pictureof how young businesses in the United States haverecovered or been affected. A series of tables givea broad overview of the 4,928 businesses includedin the Kauffman Firm Survey that are nationallyrepresentative of startups from 2004. Highlightsinclude:

values, the most challenging problems reportedby young businesses continue to be slow or lostsales and unpredictable business conditions.Slow or lost sale problems have fallen from

2008 (down by 9 percentage points), whileproblems with payments from clients hasincreased from only 2 percent in 2008 to12.8 percent in 2009 and 14.1 percent in 2010.

existing credit in 2010, about 40 percent hadtheir applications sometimes or always denied,similar to 2009 levels, and up from about33 percent in 2008. The most common reasonsreported by the firms for denial were banksputting additional restrictions on lending andinsufficient collateral. About 20 percent ofbusiness owners indicated that they didntapply for funding at some point when theyneeded credit in 2010 because they feared theirapplication would be denied.

that started in 2004 had permanently closed.The overall survival rate for the 2004 startupswas 49 percent by the end of 2010, comparedwith 56 percent for yearend 2009.

making investments in research, intellectualproperty, or future-year operations. Morethan 45 percent of firms made investments inintangible assets meant to show future-yeargain in 2010, compared with just 12 percentof firms investing in research and development(R&D). Intangible asset spending averaged

$17,000 in 2010, while average R&D spendingwas more than $63,000. High-tech firms aremuch more likely to have patents, copyrights,or trademarks.

that they introduced some product or serviceinnovation in 2010. Additionally, about14 percent of firms stated that they introduceda new or significantly improved process in theproduction of goods or provision of services bytheir firms in 2010. Finally, nearly two-thirds offirms indicated that they introduced a productor service that was new to one of their markets.

1. http://www.nap.edu/catalog/11844.html.

2. A separate series of articles from the Kauffman Foundation explores some of these concepts in more depth. http://www.kauffman.org/research-and-policy/firm-formation-and-economic-growth-research-series.aspx.


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in 2004, by 2010 about 52 percent of survivingfirms had employees. Surviving firms withemployees, which are now in their seventh yearof operations, increased average employmentto 7.5 employees in 2010.

greater than $100,000, and 11 percent hadrevenues of more than a million dollars.

Further analysis is available in papers that are postedto the KFS section of the Ewing Marion KauffmanFoundation website as they are completed (http://www.kauffman.org/kfs/).

OverviewThe Kauffman Firm Survey (KFS) is the largest,

longest longitudinal survey of new businessesin the world. At the end of the project, the KFSwill contain data over the 20042011 period on4,928 firms that began operations in 2004. Thislatest report focuses on data collected in the firmsseventh year of existence (calendar year 2010).3 Thestudy created the panel by using a random samplenew businesses started in 2004.

The KFS sought to create a panel that includednew businesses created by a person or team ofpeople, purchases of existing businesses by a newownership team, and purchases of franchises.A series of questions was asked about indicatorsof business activity and whether these wereconducted for the first time in the reference year(2004). These indicators included: 1) payment ofstate unemployment (UI) taxes; 2) payment ofFederal Insurance Contributions Act (FICA) taxes;3) presence of a legal status for the business;and 5) use of Schedule C to report business incomeon a personal tax return. To be eligible for theKFS, at least one of these activities had to havebeen performed in 2004 and none performed in aprior year. The questionnaire covered a variety of

topics, including business characteristics, strategyand innovation, business structure and benefits,financing, and demographics of the principals. The

KFS currently contains data on the baseline (calendaryear 2004) and six follow-up years (20052010).

The Kauffman Firm Survey is a research dataset

accessible to scholars around the globe. The public-use microdata file for the Kauffman Firm Surveyis available at http://www.kauffman.org/kfs/. Thesecure remote access to a confidential version ofthe KFS microdata file, which contains more detailregarding industry codes, geographical codes (zipcode, metropolitan statistical area, and state), andmany additional continuous variables (in additionto categorical variables). Details on applying to the

http://www.kauffman.org/kfs/.

respects, these new firms faced an economic crisis intheir early years of operation that was anything butaverage. This crisis began in 2008 and continued

about the most challenging problem they faced,the most-cited problem was slow and/or lostsales, followed by the unpredictability of businessconditions (Table 1). The percentage of firms citingcustomers or clients not making payments or payinglate continued to rise, up to 14.1 percent in 2010,compared with just 2 percent in 2008. Credit accessand the terms or cost of credit continued to be citedas the most challenging problem by only a small

percentage of firms.Yet, when asked to report if they applied for

and obtained loans or lines of credit and thereasons why these applications were not filed orwere denied, access to credit still seems to be anissue for many firms (Table 2). In 2010, most firms(89 percent) did not apply for new loans or forthe renewal of existing lines of credit, an increasefrom about 87 percent in 2008. For the 11 percentof firms that applied for borrowing, 60 percentreport always being approved for new financing,while 16 percent were sometimes approved and23 percent were denied. Of the firms that faced

denied applications, 91 percent report being deniedbecause of banks putting tighter restrictions on theirlending, and nearly 40 percent report being denied


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Applied for new bank credit or renewed lines of credit 12.6% 12.3% 11.1%

Loan application(s) outcome(s)Always approved 67.6% 60.3% 60.7%Sometimes approvedSometimes denied 17.5% 16.7% 16.0%Always denied 14.9% 22.9% 23.3%

Reason(s) for denialBanks putting tighter restrictions on lending n/a 89.5% 91.0%Insufficient collateral 42.2% 42.1% 39.3%Business credit history 33.3% 35.0% 28.5%Personal credit history 45.0% 44.3% 37.4%Loan too large 28.0% 16.6% 16.7%Inadequate documentation 15.6% 5.3% 3.8%Business too new 15.7% 14.2% 7.4%Other 14.7% 3.4% 4.2%

Loan requiring collateral n/a 15.6% 14.9%Accounts receivable n/a 39.7% 47.5%Vehicle/equipment n/a 35.6% 49.9%Security deposit n/a 19.0% 17.2%Intellectual property n/a 3.0% 3.0%Business real estate n/a 20.0% 23.0%Personal real estate n/a 42.7% 31.6%Other personal assets n/a 17.4% 21.9%Other n/a 5.4% 1.6%

Did not apply for debt financing when needed for fear of denial 17.6% 21.3% 19.2%

Applied for external equity financing but did not receive n/a 4.7% 4.6%

Table 1: Most Challenging Problems Facing Businesses

Source: KFS Microdata Most Challenging

Slow or lost sales 53.0% 44.1% 43.8%

The unpredictability of business conditions 24.0% 21.6% 23.7%Customers or clients not making payments or paying late 2.0% 12.8% 14.1%

Other 10.0% 7.8% 7.6%

Falling real estate values 5.0% 6.9% 5.7%

An inability to obtain credit 4.0% 4.8% 4.4%

The cost and/or terms of credit 2.0% 2.1% 0.8%

2008 2009 2010

Table 2: Financing Experiences (20082010)

Source: KFS Microdata

2008 2009 2010

for not having sufficient collateral. Credit historywas cited often as a reason to deny credit,with business credit history being an issue in29 percent of the cases and personal credit historycited in 37 percent of the cases. About 19 percentof the firms did not apply for credit at some point

when they needed it in 2010 because they thoughttheir applications would be denied. Finally, about5 percent of firms applied for, but did not receive,external equity financing (from sources such asventure capitalists, angel investors, and otherbusinesses).


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None 47% 66% 50% 74% 54% 74%

$5,000 or less 14% 13% 14% 8% 13% 10%

$5,001 to $25,000 16% 12% 16% 11% 14% 10%

$25,001 to $100,000 14% 7% 13% 5% 11% 5%

$100,001 or more 10% 2% 8% 2% 7% 2%

Table 3:Financial Injections

2008 2009 2010

Debt Equity Debt Equity Debt Equity

Comparative Advantage 44.9% 55.4% 44.1%

Sources of Comparative AdvantageUniversity Partnership 6.8% 9.8% 6.5%

Company Partnership 26.5% 41.6% 25.1%Govt Lab Partnership 2.7% 5.2% 2.5%Patents 5.8% 20.3% 4.5%

Have Patents 2.9% 9.3% 2.4%

Have Copyrights 9.1% 21.5% 8.2%

Have Trademarks 12.9% 20.6% 12.4%

Table 4: Intellectual Property in 2010

Source: KFS Micro ata

All High-Tech Not High-Tech

Only 46 percent of firms made new investments intheir businesses from debt financing in 2010, downfrom half in 2009 and 53 percent in 2008. Less than

one-quarter of firms made new equity investmentsin 2010, which was similar to 2009 and down from2008. Investment levels also continued to drop over

the period, with just 18 percent of firms investingmore than $25,000 in debt capital, comparedwith 21 percent in 2009 and 24 percent in 2008.

Similarly, just 7 percent of firms invested more than$25,000 in equity capital in 2010, which was thesame as 2009 and down from 9 percent in 2008.

High-tech firms are identified using six-digitengineering-intensive occupations, whose sharesof employment in those occupations were threetimes the national average, or industries thatexceeded the U.S. average for both research and

development expenditures per employee and forthe proportion of full-time-equivalent R&D scientistsand engineers in the industry workforce. High-techfirms were more likely than non-high-tech firmsto state that they had a comparative advantage

in the products and/or services they offered. Theyalso were much more likely to state that theircomparative advantage came from partnering withanother company, university, or government lab.They were four times as likely to state that havingpatents was a source of comparative advantage.

The holding of patents, copyrights, and trademarksis highly concentrated among high-tech sector firms.These firms are much more likely to have patents,copyrights, or trademarks.



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Firms with R&D Spending 11.6%Amount of R&D Spending $62,621

Firms with Intangible Asset Spending 45.1%Amount of Intangible Asset Spending $17,017

Intangible Asset Spending in 2010 $500 or less 12.6%

$501$5,000 41.7%$5,001$25,000 26.1%$25,001$100,000 13.9%$100,001 or more 5.7%

Total 100.0%

Table 5: Spending on Research & Developmentand Intangible Assets


spending on intangible assets in 2010. Theseare expenditures expected to produce long-termbenefits for businesses, such as brand developmentand worker training. Only about 12 percent offirms invested in research and development (R&D)in 2010. However, R&D investments were higher,averaging about $62,000, compared with just$17,000 on tangible assets.

Product, Service, and ProcessInnovations or services or a significantly improved product orof KFS firms indicated that they introduced someproduct or service innovation in 2010. Additionally,about 14 percent of firms stated that theyintroduced a new or significantly improved processin the production of goods or provision of servicesby their firms in 2010. Finally, nearly two-thirdsof firms indicated that they introduced a productor service that was new to one of their markets.Interestingly, while most of the markets wereregional or national, about one-third of those firmsindicated that they introduced a product or serviceto the international market.

In terms of the customer base, most KFS firmssold to individuals (53 percent of sales) and otherbusinesses (41 percent of sales), while only about

6.5 percent of sales went to government customers.Less than 20 percent of firms had a predominantlynational customer base, while about two-thirds offirms sold to customers in the same city, county, orstate. Only about 11 percent had a neighborhoodbase as their primary customer location, and just3.1 percent were predominantly international.

Introduction of products or servicesthat were new or significantly improved ....... 19.5%

Introduction of processes that were newor significantly improved .............................. .. 13.8%

Introduction of any product/service thatwas new to any market(s) wherefirm competes ...................................................60.6%

Regional ......................................................66.6%National.......................................................59.1%International ................................................ 35.1%

Main type of customer(s)Individual .................................................... 52.9%Businesses.................................................... 40.5%Government................................................... 6.5%

Where most of the firms customersare located

In neighborhoods local to the business ........ 11.0%

In the same city or county ........................... 30.6%In the same region, such as innearby counties or states ............................. 36.5%Nationwide .................................................. 18.9%International .................................................. 3.1%

Firms with international sales ......................... 15.2%Less than 5% ............................................... 55.0%6%25% ......................................................25.2%26%50% ......................................................7.2%51%75% ......................................................5.0%76%100% ................................................... 7.7%

Firms with Internet sales ................................ .. 26.7%Less than 5% ............................................... 31.9%6%25% ......................................................27.4%26%50% .................................................... 15.6%51%75% ......................................................8.6%76%100% .................................................. 16.5%

Firm website ......................................................47.4%

Firm email ..........................................................97.5%

Table 6: Selected Firm Characteristics in 2010



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About 15 percent of firms indicated that they hadinternational sales. However, more than half statedthat those sales made up less than 5 percent of theirtotal revenues. About 13 percent of firms indicatedthat international sales made up half or more of theirannual revenues.

More than a quarter of firms sold their goods orservices over the Internet. However, nearly one-thirdof those indicated that Internet sales made up lessthan 5 percent of their total sales. Yet, about one-quarter of the firms indicated that Internet sales2010 nearly all (97.5 percent) firms had an emailaccount, while nearly half (47.4 percent) had awebsite. The Internet has clearly touched the vastmajority of firms.

employees other than the firm owner(s) in 2004, by2010, 52.2 percent of firms had employees. Overall,firms averaged less than four employees, but forfirms with employees, the number averaged 7.5,compared with just 4.6 employees in 2004. Thus,surviving firms grew substantially over the period20042010.

Firms with employees 40.9% 52.2%

Average employment 1.9 3.9Average employment(employers only) 4.6 7.5

Distribution of employment0 59.2% 47.8%1 14.0% 11.3%2 9.1% 11.1%3 4.6% 6.6%4 3.1% 5.2%59 6.0% 9.1%1049 4.0% 7.5%50+ 0.2% 1.3%

Table 7Employment by KFS Firms All Firms

SurvivingFirms


2004 2010

In terms of revenues, quite a few of thesebusinesses remain small by any conceivable measure.About 20 percent still have sales of $5,000 or less,and about a quarter have assets in that range.

However, many of the firms have grown to be quitelarge. About 11 percent of firms have revenues of amillion dollars or more, and one-third of firms haverevenues of between $100,000 and $1,000,000.

Zero 11.1% 6.7%

$5,000 or less 8.9% 16.1%

$5,001$25,000 13.6% 19.9%

$25,001$100,000 23.2% 23.6%

$100,001$1 million 32.4% 26.9%

More than $1 million 10.9% 6.8%

Total 100.0% 100.0%

Table 8Distribution of Revenues and Assets in 2010


Revenues Assets

yearend 2010, 48.9 percent of firms had survived,compared with 55.8 percent at yearend 2009 and61.3 percent at yearend 2008. This is comparableAdministration and other government agencies.4

4. http://www.sba.gov/sites/default/files/files/sbfaq.pdf.

Figure 1: Firm Survival 20052010

100%

80%

60%

40%

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2005 2006 2007 2008 2009 2010



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A N O V E R V I E W O F T H E K A U F F M A N F I R M S U R V E Y : R E S U L T S F R O M 2 0 1 0 B U S I N E S S A C T I V I T I E S

KauffmanFirm Survey

The

2004

2005

2006

2007

2008

2009

2010

2011


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An Overview of the Kauffman Firm Survey: Results from 2010 Business Activities

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